BSE 500 Corporates to Borrow Rs. Rs. 20,000 for Dividend Payments

India Ratings & Research (Ind-Ra) says that several BSE 500 corporates (excluding banks and financial services companies) adopted an aggressive dividend payment strategy in 2013, despite a reduction in their net profits. Ind-Ra expects 419 of the BSE 500 corporates to pay an aggregate dividend of INR1,000-1,200bn in FY14 and avail aggregate debt of Rs. 18,000- Rs. 20,000 for the same.

The agency estimates that the 419 corporates availed Rs. 191.8bn of debt in FY13 to fund the aggregate dividend payment of Rs.  1,049 bn. The trend of dividend payment behaviour over FY09-FY13 suggests that in most instances cash flow from operations (CFO) was adequate and instances of debt requirement declined steadily from FY11-FY13. However, the total quantum of debt needed increased sharply in FY13 (after declining in FY12) due to an increase in dividend payments and a reduction in profit after tax (PAT). 




In Ind-Ra’s assessment, 37 public sector units (PSUs) among the 419 corporates paid aggregate dividend of Rs.  450.6 bn in FY13, and of these, eight PSUs had to borrow Rs.  128.9 bn due to inadequate CFO. However, considering the sovereign linkage of these PSUs, their credit profiles are unlikely to be impacted. However, more worrisome may be case of 12 private corporates with high leverage above 5.0x, which could have borrowed an estimated Rs. 27.7bn to pay dividends.

Lenders have to watch out for corporates whose CFO is negative or have CFO below the amount of divided paid, while PAT may be positive. In some of these cases, dividend payments could be financed by debt, even when financial leverage is high. As such, some loan documents have covenants with respect to dividend payments, but they usually require the borrower to inform or seek approval from bankers before paying dividends. Decision triggers are usually accounting profit, balance sheet net-worth or debt/equity ratio. 
 
In the report, the agency has explained that under The Companies Act 2013 a corporate can pay dividend out of its current or past accounting profit, in essence out of PAT. However, it is possible that while a corporate can generate positive PAT, its CFO may be negative due to high working capital requirements to support revenue and EBITDA profits.

In such cases a company paying dividend higher than its CFO is likely to tap its cash reserves, investments and non-recurring income. If this is insufficient, the company would effectively rely on debt to finance dividends. Reliance on cash reserves or debt to partly or fully fund dividend payments has a negative impact on net leverage (adjusted debt net of cash dividend / EBITDA) and the overall credit profile.

Contacts:
Sudarshan Shreenivas
Associate Director
+91 22 4000 1783

Deep N Mukherjee
Senior Director
+91 22 4000 1700
Saraanya Shetty
Manager - Corporate Communications and Investor Relations       

Work: +912240001729  
Fax: +912240001701        Email: saraanya.shetty@indiaratings.co.in

India Ratings & Research A Fitch Group Company
Wockhardt Towers, West Wing, Level 4
Bandra Kurla Complex, Bandra East
Mumbai, 400051 India

For latest ratings and research updates, visit http://www.indiaratings.co.in/


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